~~AC1025_ZB_2016_d0

~~AC1025_ZB_2016_d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON AC1025 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences

Principles of Accounting

Monday, 9 May 2016 : 10:00 to 13:15

Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of

Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further
question from either Section B or C. All questions carry equal marks.

Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

Extracts from compound interest tables are given after the final question on this paper.

8-column accounting paper is provided at the end of this question paper. If used, it must
be detached and fastened securely inside the answer book.

A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER

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SECTION A

Answer question 1 from this section.

1. (a) Lysander Ltd is preparing its financial statements for the year ended 31 December
2015.

At 31 December 2014 it had computer equipment that cost £1,004,408, all of which had
been purchased on 1 January 2013, and had accumulated depreciation at 31
December 2014 of £697,600. Computer equipment is depreciated on a straight line
basis with no residual value over four years and is charged on a monthly basis. A
computer system, costing £6,800, was sold on 1 January 2015 for £1,800. On 1st April
2015 Lysander part exchanged a computer which had cost £24,000, for a new
computer, costing £34,600, paying a cheque in final settlement of £18,000.

Required:

Show how the computer equipment of Lysander Ltd will be shown in the:

i. Income statement for the year ended 31 December 2015, and

ii. Statement of financial position as at 31 December 2015. (6 marks)

(b) Explain the objective of published financial statements and identify the two principal
characteristics of financial statements which contribute to achieving this objective.
(6 marks)

(c) In the context of cost-volume-profit analysis explain the meaning, and give an example,
of each of the following terms:

i. Non-linear variable costs

ii. Stepped fixed costs
iii. Relevant range (6 marks)

Question continues on next page.

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 (d) A company makes three products to which the following budget information relates:

B A T
£ per unit £ per unit £ per unit
Selling price 100 120 145
Labour at £20 per hour 40 40 60
Materials at £10 per kg 10 20 30
Fixed overheads 30 40 20
Profit 20 20 35

The marketing department says the maximum annual demand is for 1,000 units of
Product B, 1,200 units of product A and 1,500 units of product T, and the factory has
budgeted to produce that number of units. It has just been discovered that next year
materials will be limited to 5,000 kg and labour to 10,000 hours.

Required:

Compute the priority in which products should be made and sold and the maximum
contribution for the year. (7 marks)

SECTION B

Answer question 2 and not more than one further question from this section.

2. The following trial balance was extracted from the nominal ledger of Oberon Ltd on 31 March
2016:

£ £
Sales 1,150,000
Inventories at 1 April 2015 75,000
Purchases 465,000
Distribution costs 220,000
Administrative expenses 340,000
Bad debts written off 36,000
Loan interest paid 8,000
Land and buildings cost 600,000
Plant and equipment cost 340,000
Land and buildings accumulated depreciation at 1 April 2015 96,000
Plant and equipment accumulated depreciation at 1 April 2015 63,000
Trade receivables 60,000
Provision for doubtful debts 5,000
Bank balance 24,000
Ordinary share capital (£1 shares) 400,000
Share premium 100,000
Bank loan 200,000
Retained earnings 61,000
Ordinary dividends paid 15,000
Trade payables 54,000
Advance deposits from customers ________ 6,000
2,159,000 2,159,000

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UL16/0290 Page 3 of 11 D1
The following adjustments have yet to be accounted for:

1. Oberon Ltd has two items in inventory at 31 March 2016.

Details are as follows:
Item Puck Flute
£ £
Total cost 16,200 76,000
Selling price 15,000 83,000

2. Oberon Ltd paid an annual insurance premium of £16,800 for the year 1 September
2015 to 31 August 2016. This payment is included in administrative expenses.

3. The company’s depreciation policy is as follows:

Buildings Straight-line over 50 years
Plant and equipment 10% straight-line
The cost of the land was £200,000, and all non-current assets are assumed to have
zero residual values.
There were no additions to, or disposals of, non-current assets during the year ended
31 March 2016.
Depreciation on buildings is charged to administrative expenses and depreciation on
plant and equipment is charged to cost of sales.

4. At the year end, trade receivables include a balance of £4,800 which is considered
irrecoverable. Provision for doubtful debts requires adjusting to 5% of remaining
receivables. The company includes bad, and changes in provision for doubtful, debts as
other operating expenses in the income statement.

5. The bank loan was received on 1 July 2015 and is repayable in full in five years.
Interest is charged at a fixed rate of 8% per annum.

6. Tax on the profits for the year ended 31 March 2016 is estimated at £10,000.

7. The bank reconciliation performed at 31 March 2016 revealed that Oberon Ltd had
accounted for a cheque for £4,500 sent to a credit supplier as £5,400.

8. Oberon Ltd propose a dividend of 5p per share for the year ended 31 March 2016.

9. Oberon Ltd paid rent of £25,000 on 27th March 2016 which covers the period 1 April
2016 to 30 June 2016. This amount has been included in administrative expenses.

Required:
Prepare the following financial statements for Oberon Ltd:

(a) Income statement for the year ended 31 March 2016. (11 marks)

(b) Statement of changes in equity for the year ended 31 March 2016. (2 marks)

(c) Statement of financial position as at 31 March 2016. (12 marks)

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UL16/0290 Page 4 of 11 D1
3. Extracts from the financial statements for Titania Ltd for the year ended 31 March 2016 are
as follows:

Statement of profit or loss for the year ended 31 March 2016

£
Profit from operations 819,640
Finance costs (89,600)
Profit before tax 730,040
Income tax (245,700)
Profit for year 484,340

Statements of financial position at 31 March

2016 2015
£ £
Non-current assets
Property, plant and equipment 982,600 797,500
Intangible assets 580,040 386,900

Current assets
Inventories 430,040 285,550
Trade receivables 342,700 224,150
Government bonds 40,000 10,000
Cash 37,470 3,800
Total assets 2,412,850 1,707,900

Equity share capital (£1 shares) 312,400 232,800

Share premium 398,200 351,000
Retained earnings 534,800 282,100

Non-current liabilities
Borrowings 567,400 423,000
Preference shares 75,000 -----

Current liabilities
Borrowings 115,600 51,000
Bank overdraft 51,200 27,230
Tax payable 201,800 192,520
Trade payables 146,700 135,900
Accrued interest 9,750 12,350
Total equity and liabilities 2,412,850 1,707,900

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UL16/0290 Page 5 of 11 D1
Additional Information

1. Included in profit from operations is a loss of £84,810 in respect of the disposal of

machinery in the year. This machinery had a net book value of £127,800 at the disposal
date. All additions were paid for in cash.

2. The depreciation charge on property, plant and equipment for the year was £232,900.

3. Intangible assets costing £251,340 were purchased for cash during the year. Intangible
assets with a carrying amount of £17,000 were sold for £24,000 during the year. The
profit on disposal has been offset against operating costs. An impairment review at 31
March 2016 identified a fall in the recoverable amount of intangible assets. As a result,
an impairment loss of £20,000 was identified and written off to administrative expenses.
Amortisation has been charged against profit from operations.

4. On 1 April 2015 Titania Ltd made a one for ten bonus issue from share premium. A
further share issue took place in December 2015 for cash.

5. Titania Ltd declared and paid a dividend during the year.

6. Redeemable preference shares in the amount of £75,000 were issued for cash during
the year.

7. The government bonds are highly liquid and management has decided to class them as
cash equivalents.

Required:

Prepare a Statement of Cash Flows for Titania for the year ended 31 March 2016 showing
operating cash flows using the indirect method. (25 marks)

4. Helena Products plc is a manufacturer of office furniture. In January 2015 the company had
carried out a strategic review and had decided to target people working from home. In order
to achieve this strategy the company had acquired a building with a showroom and a
warehouse and had invested in new delivery vehicles. This expansion has been financed by
loans and the bank overdraft facility has been fully utilised.

Financial information concerning the business is given below.

Income statements for the year ended 30 November

2014 2015
£000 £000
Revenue 10,482 11,365
Operating profit 914 1,042
Interest charges (22) (81)
Profit before taxation 892 961
Taxation (358) (386)
Profit for the year 534 575

Question continues on next page.

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UL16/0290 Page 6 of 11 D1
 Statements of Financial Position
2014 2015
£000 £000
Non-current assets
Property, plant and equipment (cost less depreciation)
Premises 5,240 7,360
Plant and equipment 2,375 4,057
7,615 11,417

Current assets
Inventories 2,386 5,420
Trade receivables 2,540 2,280
4,926 7,700
Total assets 12,541 19,117

Equity
Share capital 2,000 2,000
Retained Earnings 7,813 8,268
9,813 10,268
Non-current liabilities
Borrowing – loans 1,220 3,675

Current liabilities
Trade payables 1,157 2,245
Taxation 179 193
Short-term borrowing (all bank overdraft) 172 2,736
1,508 5,174
Total equity and liabilities 12,541 19,117

Required:

(a) Calculate for Helena Products Ltd for both years the following ratios using the available
information (to two places of decimals):

i. Operating profit margin

ii. Net profit margin (after taxation)
iii. Asset Turnover ratio
iv. Return on capital employed
v. Current ratio
vi. Quick Asset ratio
vii. Receivables Collection period
viii. Inventory holding period
ix. Gearing ratio (debt to capital employed) (15 marks)

(b) Using the above ratios, and any other ratios or information you consider relevant,
comment on the results of the company and on the new strategy. (10 marks)

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SECTION C

Answer one question and no more than one further question from this section.

5. The Hermia Company is considering the production of a new product to add to its range of
electrical components.

The following information is available.

1. A market survey has been undertaken but not yet paid for. It will cost £30,000. The
survey suggests that the life cycle of this product will last for four years and demand is
likely to be 10,200 units in the first year rising by 10% per annum in each of years 2 and
3 and falling to 9,000 units in year 4. The unit selling price will be £34. There will be no
stocks of finished goods.

2. The company already owns the machinery that would be used in the manufacture of
this product. If it is not used for this product, it will be sold immediately for £200,000. If it
is used for this product, after four years it is likely to have a residual value of £40,000.

3. Since the production cycle is very short, both production and sales could start
immediately, should the production go ahead. Each unit of the new product will require
2 hours of labour which will need to be hired. There will be no problem hiring at £8.00
per hour.

4. Each unit of the new product will require one component, a capacitor. The company has
a stock of 15,000 capacitors which were purchased two year ago for £4.00 each. These
have no resale value or alternative use. Any capacitors to be purchased from now on
will cost £5.00 each.

5. Each unit produced will also require £8.00 of sundry raw materials such as wire and a
circuit board. The company holds no stock of the sundry raw materials.

6. Fixed production overheads allocated to this project will cost £40,000 per annum.

7. The cost of capital is 15% per annum.

8. Assume all cash flows occur on the last day of each year except for the immediate
disposal of the existing machinery.

Required:

(a) Calculate the Net Present Value (NPV) of this project. (14 marks)

(b) Calculate the payback period of this project using both nominal and discounted cash
flow. (4 marks)

(c) Advise Hermia Company on the project and outline two other factors that you would
take into account in your decision. (7marks)

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UL16/0290 Page 8 of 11 D1
6. Horatio operates a small company which services mowers for local parks departments. Each
service uses a special machine that requires a skilled operator and is finished using unskilled
labour. Horatio has produced a standard cost schedule as all mowers go through the same
process. Overheads are absorbed using standard labour hours. The materials come in
packs; each mower serviced should use one pack of materials. Horatio budgets to service
288 mowers per month.

Standard cost for servicing a mower

£
Skilled labour: 2 hours at £8 per hour 16
Unskilled labour: 1 hour at £5 per hour 5
Materials: 1 pack at £3 per pack 3
Variable overheads: 3 hours at £2 per hour 6
Fixed overheads: 3 hours at £10 per hour 30
Total standard cost 60
Profit mark-up at 30% of cost 18
Price charged 78

Actual results for May 2016

£ £
Sales: 330 mowers serviced 26,400
Less costs
Skilled labour: 594 hours 5,049
Unskilled labour: 396 hours 1,881
Materials: 350 packs 1,190
Variable overheads 1,815
Fixed overheads 8,500
Total costs for May 18,435
Profit for May 7,965

Required:

(a) Prepare an operating statement, reconciling budgeted and actual profit for Horatio for
May 2016, showing two variances both for sales and for each of the five cost categories
(twelve variances in total). (17 marks)

(b) Prepare a brief report to the owner of Horatio Ltd commenting on the performance in
May 2016, suggesting possible reasons for any unexpected results. (8 marks)

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7. Theseus Ltd is a newly formed business making a single product. You are given the following
information, extracted from the budget, for quarter 3 of the current accounting year:

Production and sales volume 150,000 units

Selling price £10 per unit
Variable manufacturing cost
(including direct labour and material) £6 per unit
Fixed manufacturing overhead £300,000
Fixed selling and administration overhead £150,000
Variable selling and administration overhead £1 per unit sold.

You are further informed that actual results were:

Sales volume 120,000 units

Production volume 180,000 units
Selling price and costs were as budgeted.

Required:

(a) Determine the break-even volume for quarter 3. (4 marks)

(b) Prepare a summary of the budgeted results for quarter 3 based on the budgeted sales
and production volume. (5 marks)

(c) Assuming there is no opening stock, prepare a summary of the results for quarter 3
based on the actual sales and production volume. You should adopt an absorption
costing approach where stock is valued at full manufacturing cost and any under or
over absorbed overhead is written off in the period. (9 marks)

(d) In light of your answers to (a) and (b) comment on your results in (c). (7 marks)

END OF PAPER

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UL16/0290 Page 10 of 11 D1
Extracts from compound interest tables

Present value of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

Annuity of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

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